Although reduction of fiscal deficits was one of the major objectives of the reform process, a review of the fiscal deficits of both the centre and states level reveals that after remaining subdued at a moderate level, fiscal deficits again became larger towards the close of the nineties.
The hurdles faced by the finance ministers of India in keeping the fiscal deficit below 3-4 percent of GDP are: growth of expenditure as a result of the recommendation of the fifth pay commission, rising trend of interest burden as a result of resort to higher borrowings, growth of subsidies and failure of the government to reduce them due to the pressure of powerful lobbies.
On the revenue side, reduction of rate of taxes (personal and corporate taxes and excise and custom duties) did not result in more than proportionate increase in tax revenues. Regarding non tax revenues, investment in public sector undertakings yielded a rate of return, which was below the cost of funds.
To lower the fiscal deficit, it would be necessary to (i) control administrative expenditure (ii) reduce subsidies on non merit goods (iii) improve cost recovery of services provided by the state (iv) undertake disinvestment of loss making enterprises (v) reduce public debt to scale down interest burden (vi) widen tax base through agricultural taxation and taxation of services and (vii) tighten tax administration to plug tax evasion.
The government should pass Fiscal Responsibility Act so as to introduce fiscal discipline. However, the success of the Act will depend on the extent to which the governments at the centre and the state abide by its directions.